A Comparison of Fixed Trust vs Discretionary Trust

One of the most important decisions to be made when setting up a trust concerns the fixed trust vs discretionary trust, as this choice will affect how assets are managed and distributed among the beneficiaries. This article describes the differences between fixed and discretionary trusts, provides an example of a fixed trust versus a discretionary trust, and discusses how a discretionary trust can transition to a fixed trust. At One Pacific Trust, we are committed to helping you navigate these options to ensure your trust aligns with your goals and effectively meets the needs of your beneficiaries.

The Essentials of Fixed Trusts and Discretionary Trusts

Fixed Trust vs Discretionary Trust

The differentiation between a fixed trust and a discretionary trust lies essentially in the manner in which assets are divided by the trustee and distributed among the beneficiaries.

• Fixed Trust: A fixed trust is one whereby the beneficiaries are entitled to a fixed percentage of the assets in the trust provided within the trust deed. No discretion can be exercised by the trustee against this, since he is simply obliged to distribute in accordance with instructions in the trust document. An example would be where the trust has provisions stating that each beneficiary is entitled to an equal share of income derived in any given year.
• Discretionary Trust: The discretionary trust allows the trustee to use his discretion regarding the manner and time of distribution of the trust's assets to the beneficiaries. This flexibility will enable the trustee to pay regard to the circumstances of all beneficiaries, their needs, and any other relevant factor in considering distributions. The deed may list potential beneficiaries; however, it is the trustee who decides upon who gets what and when.

Fixed Trust vs Discretionary Trust: Real-World Examples

Fixed Trust vs Discretionary Trust Example

Let's go a little deeper, in the fixed trust versus discretionary trust example, for better understanding:

• Fixed Trust Example: A father forms a fixed trust in favor of three of his children. The trust instrument stipulated that the three children must each receive 25% of the income derived from the trust on a yearly basis and the remaining 25% of such income shall be reinvested within the trust. The Trustee, in this case, has no discretion to distribute more to a child who may need it, and less to the other end.
• Discretionary Trust Example: Consider, on the contrary, a discretionary trust established by a grandparent for the benefit of the grandchildren. The grandchildren are named in the trust instrument as possible beneficiaries, but nothing is said as to what each is to receive. It is left to the discretion of the trustee to distribute trust income and principal to the grandchildren based on consideration of their various needs. Thus, a trustee may wish to distribute more to a grandchild with specific current needs for college or who has fallen on hard times.

Difference Between Fixed and Discretionary Trust

The difference between fixed and discretionary trust primarily revolves around the level of control the trustee has over asset distribution:

• Control and Flexibility: In a fixed trust, the trustee has no control over how assets are distributed; everything is dictated by the trust deed. In a discretionary trust, the trustee has significant flexibility and can make decisions based on the changing circumstances of the beneficiaries.
• Predictability: Fixed trusts provide predictability for beneficiaries since they know exactly what they will receive and when. Discretionary trusts, on the other hand, offer less certainty, as beneficiaries do not have a guaranteed entitlement to the trust’s assets.
• Suitability: Fixed trusts are generally suited for situations where the grantor wants to ensure equal or specific distributions to beneficiaries, without the risk of unequal treatment. Discretionary trusts are more appropriate when flexibility is needed, allowing the trustee to adapt distributions according to the beneficiaries' varying needs over time.

Changing Discretionary Trust to Fixed Trust

Changing Discretionary Trust to Fixed Trust

The change of circumstances may make discretionary fixed trust, which could be performed by replacing the trust deed in order to remove the discretion of trustees and define distributions to beneficiaries as fixed.The steps involved in making this change include:

1. Original Trust Deed: The original deed of trust has to be firstly carefully checked for whether amendments are allowed or not. Some deeds of trust provide for amendments, but others may be quite unyielding in this regard.
2. Seek Legal Advice: Changing a trust type is a serious legal action that may have long-lasting implications. It is, therefore, very important to seek advice of lawyers regarding possible outcomes and to go about making the change correctly.
3. Amendment of the Trust Deed: A new trust deed or an amendment containing the new terms shall be prepared. In this, the fixed distributions to the beneficiaries shall be outlined, thereby removing the discretion given to the trustee.
4. Obtain consent from the beneficiary: Subject to the trust deed's terms and relevant laws, it may be so in making such alteration that consent from the beneficiaries shall have to be obtained. Particularly when the proposed change affects their interest in the said trust adversely.
5. Lodge the Amendment: An amendment that has been drafted and agreed upon may be required to be registered with the legal or governmental authorities, where required under any relevant jurisdictions.
6. Give Effect to the Change: Once the amendment is finalized and registered, the trustee must administer the trust in the new fixed terms and also ensure that all distributions are made in conformity with the updated trust deed.

Conclusion

The decision of whether to establish a fixed trust or a discretionary trust is a key one in estate planning, since both types of trusts offer varying degrees of control and flexibility. The difference between fixed trust and discretionary trust is one thing that can greatly help you make an informed choice among your particular needs and the needs of your beneficiaries. If the circumstances change, then discretionary trust can be changed to fixed trust, but that needs consideration and consultation with a lawyer. The fixed trust vs discretionary trust example will help you better imagine how each type of trust may work in your particular case to ensure that your assets are managed and distributed the way you want.